3 Megatrends Powering Today’s IPO Market

The cloud, mobile and Big Data could possibly fuel a solid boom

Over the past few months, a variety of hot IPOs have hit the market. Some include ExOne (NASDAQ:XONE), which is up 51%, and SolarCity (NASDAQ:SCTY), which has returned 130%.

However, over the years, IPO rallies have often fizzled quickly. Just look at the disappointments with the offerings from companies like Facebook (NASDAQ:FB), Zynga (NASDAQ:ZNGA) and Groupon (NASDAQ:GRPN).

Actually, I think so. First of all, it looks like we may be in the middle of a sustainable bull market. With interest rates at rock-bottom levels, investors have little choice but to seek out equities as a way to get higher returns.

There are also other encouraging signs. For example, it looks like the federal government is taking action to cut back on the deficit; Europe keeps making moves to get things back on track; the U.S. real estate market appears to be in the early stages of a massive turnaround; and the banking system is fairly solid.

Perhaps this accounts for the recent spike in mergers and acquisitions, such as Warren Buffett’s $23 billion deal for Heinz (NYSE:HNZ), Liberty Global’s(NASDAQ:LBTYA) proposed $16 billion plan to buy Virgin Media (NASDAQ:VMED) and Comcast’s (NASDAQ:CMCSA) agreement to shell out $16.7 billion for the rest of NBCUniversal it doesn’t already own. All in all, CEOs are getting their confidence back (InvestorPlace Editor Jeff Reeves has an excellent post on why all these buyouts could be bullish).

But a rip-roaring bull market isn’t enough to spark a true return of IPOs. Some type of secular trend needs to power the new offering market — a role the Internet played back in the 1990s’ IPO boom.

Well, three megatrends now underway could fill that need. Here’s a look:

The Cloud

This technology allows companies to access applications via the Internet. The approach tends to be cheaper than traditional software applications because it eliminates the need to buy servers or to hire armies of consultants. There are also benefits in terms of access to real-time data.

The IPO market has already seen a variety of successful cloud IPO, such as Salesforce.com (NYSE:CRM), Workday (NYSE:WDAY) and ServiceNow (NYSE:NOW).

But it’s a good bet more and more deals will hit the market. According to IDC, the cloud market is expected to grow at an annual rate of 24%, going from $23 billion in 2011 to $67 billion by 2016.

This is certainly great news for early-stage companies, such as app developers, mobile ad platforms and infrastructure operators. Hey, just look at Ruckus Wireless (NYSE:RKUS), which is a provider of Wi-Fi gear. The company came public in mid-November, and the shares have since gone up about 51%.

Other newly public companies are transforming their businesses with mobile, such as Trulia (NYSE:TRLA) and Zillow (NASDAQ:Z). Both have built cutting-edge mobile apps, which have propelled their businesses. Since their IPOs, Trulia is up 80% and Zillow has gained 112%.

Big Data

This megatrend is in turn getting powered by the rise of the cloud and mobile devices, two markets that are generating huge amounts of data. So with new Big Data technologies, it will be possible to create new applications to mine it.

According to Transparency Market Research, the Big Data tech market is expected to go from $6.3 billion in 2012 to $48.3 billion in 2018. That’s an annual growth rate of 40.5%.

The only Big Data operator to hit the IPO market so far is Splunk (NASDAQ:SPLK), which has gained 106%. But lots of deals are likely over the next few years. Keep in mind that VCs have been investing aggressively in startups such as GoodData, Cloudera and QlikTech.

Verdict

OK, nothing is guaranteed, especially with the IPO market. If broader markets do plunge, then the momentum will come to a screeching halt.

But the fact remains that the key ingredients are in place for a boom: a healthy bull market and the emergence of several megatrends. And so far, it looks like investors are already revving things up.

Based in Silicon Valley, Tom Taulli is in the heart of IPO land. On a regular basis, he talks with many of the top tech CEOs and founders trying to find the next hot deals and finding out which start-ups are stinkers.

A long-time follower of the IPO scene, back in 1999 Tom started one of the first sites in the space called WebIPO. It was a place where investors got research as well as access to deals for the dot-com boom. Tom also wrote the top-selling book, Investing in IPOs. In it, he covers all the aspects of analyzing an IPO, such as reading the prospectus, detecting the risk factors and understanding some of the arcane regulations. But don’t worry — if that process is too intimidating for you, thankfully Tom will do the legwork for you right here in the IPO Playbook blog.

Tom is routinely quoted in the media about upcoming deals with his interviews on CNBC and Bloomberg TV, but he is eager to take your questions too. You can message him on Twitter at @ttaulli. And feel free to weigh in via the comments section on any of his IPO Playbook posts.